State Pension Funds and Tax Reform

Much fuss has been made over the amount of cash and assets some of America’s biggest companies have stashed away off-shore, estimated by some at more a trillion dollars. Under current tax law, the government considers all that taxable at the 35% corporate rate, and because of this tax burden (unique in that America taxes a company’s world-wide income rather than just that which involves America), companies have chosen to let cash accumulate elsewhere rather than bring it to the US for investment or distribution. The new tax law offers an opportunity for companies to repatriate their foreign cash, at a much-reduced rate of 14.5% for cash and 7.5% for hard assets (my best info at the time of this writing), and changes taxation rules to better align with how the rest of the world taxes foreign earnings.

This aspect of the tax reform package is expected to produce a one-time windfall for the Treasury, and its proponents assert (correctly, in my opinion) that the influx of all this cash will be a significant boost for the economy.

Its detractors, on the other hand, asset that much of this repatriated cash will be used for stock buy-backs and for paying of dividends to share holders. In other words, rather than create jobs for the working classes, it’ll simply be used to make the rich richer.

Lets set aside the fact that more money in the hands of the investing class will create more economic activity, and thus more jobs. Lets consider, instead, one thing that the detractors either overlook or conveniently fail to mention in their complaints: some of the biggest shareholders of these big, cash-rich companies are public pension funds.

It’s no secret that many states’ pensions are woefully underfunded. This interactive article at the Wall Street Journal tells us that 40 of our 50 states have are underfunded by at least 15%, and that 20 states are underfunded by a third or more. Among the worst-condition states are such reliably blue voters like Illinois, Connecticut, Hawaii and Massachusetts.

Consider the biggest holder of offshore cash: Apple. Apple has a quarter trillion dollars in cash, most of it off-shore. If Apple were a nation, its cash alone would rank it 42nd in the world by GDP. Its market capitalization rivals the GDP of Mexico, the world’s 16th largest economy. Apple is also, as it turns out, a substantial holding of many state pension funds. It is the top equity holding in Illinois ($1000M), California ($2000M), New Jersey ($600M), and Connecticut ($150M), to name but four. And that’s just Apple. Compare the lists of top holders of foreign cash and top positions in state pension funds, and you’ll find quite a bit of commonality.

Lets accept the possibility that a substantial part of repatriated cash is used to build shareholder value, both via stock buy-back and via dividend distributions. Wouldn’t that elate the managers of these public pensions? Wouldn’t that thrill the politicians who have to figure out how to make up for the shortfalls these pensions currently face? Wouldn’t that exhilarate public union bosses? Wouldn’t that give comfort to those public union members who are not due to retire for years or decades, and who’d face the highest probability of default on what’s promised them? And, wouldn’t that send a tingle up the legs of liberal pundits, who are typically loud advocates for public unions and their pension systems?

Beyond the opportunity for a one-time windfall from repatriation of foreign cash, the pension fund managers should be looking forward to the economic stimulus the overall tax reform package will generate. A booming stock market will help their deficits and shortfalls out, as well, given that these funds are heavily invested in equities, and strong economic performance by blue chip companies will translate, as well, into more and more secure dividend payouts.

The doomsaying and negativity regarding this aspect of the “Tax Cuts and Jobs Act” is typical of the “if we didn’t write it, it obviously sucks” combativeness of virtually all things political today. In matters of high political stakes, the press increasingly demonstrates little to no interest in presenting the full picture, or be genuine in its analyses. In the case of foreign-held cash, I suspect there’s a lot of sour grapes. For one, were Clinton President, they’d have expected her to force this foreign cash home at the exorbitant 35% tax rate. The fact that Obama didn’t manage this is, I suppose, an irrelevance. For another, the notion of getting a nice windfall isn’t good enough, because the people they don’t like (the GOP-led government, the rich, big companies) also get a nice windfall, and it’s well established that people would rather suffer than benefit when the former means that others suffer more or when the latter means others would benefit more. Greed and envy for others’ stuff is quite the motivator. It’s also a miserable way to live.

While this tax reform bill is far from perfect, it’s good, especially on the corporate side. It’ll do a lot to restore competitiveness and should do a lot of good to the economy. When public pensions reap the benefits of repatriated cash, their managers really should send a thank-you letter to Trump and the GOP.

I am twice-retired, a former rocket engineer and a former small business owner. At the very least, it makes for interesting party conversation. I'm also a life-long libertarian, I engage in an expanse of entertainments, and I squabble for sport.

Nowadays, I spend a good bit of my time arguing politics and editing this website.